Tax insights | NSW land tax surcharge implications

Introduction

As part of the 2016 Budget measures, the NSW Government enacted increases to stamp duty and land tax charges for foreign investors. The purpose of this article is to discuss the general operation of the NSW land tax surcharge and implications to foreign and Australian residents.

What is the NSW land tax surcharge?

From 31 December 2016, foreign owners of “residential land” located in NSW are liable to pay the NSW land tax surcharge of 0.75% of the taxable value of residential land.

Insight: two of the measures typically relied upon by investors to escape land tax liabilities, the “principal place of residence exemption” and the land tax threshold, do not apply to foreign owners in the context of the land tax surcharge. In practice, this will mean that most foreign owners of NSW residential land will be liable to pay the new land tax surcharge, even if they are not liable to pay the base land tax on the subject land.

Australian Citizens are excluded from the operation of both the duty surcharge and land tax surcharge.

Insight: Australian permanent resident visa holders entitled to obtain Australian citizenship could do so in order to avoid the application of the duty and land tax surcharges; that said, we acknowledge there are other compelling commercial and non-commercial reasons why foreign persons will choose to retain Australian permanent residency status rather than convert to Australian citizenship.

It is also important to note that the new land tax rules also preserve other concessions and exemptions, and may apply differently to holders of permanent resident visas and New Zealand nationals.

Implications of the NSW land tax surcharge

Foreign owners affected by the land tax surcharge incur increased land holding costs.

Insight : the land tax surcharge may be tax deductible to foreign owners who incur the surcharge on a rental property.

Although Australians are generally excluded from the land tax surcharge, it may still affect Australian purchasers of residential land indirectly where:

the vendor is a foreign person; and

the Contract for the sale and purchase of land is marked such that land tax is “adjustable” (this essentially passes the burden of the land tax surcharge onto the purchaser).

Insight : on your next purchase of property, before you sign the Contract, you should consult with your solicitor to confirm whether a vendor is passing on the costs of the land tax surcharge and negotiate its removal if possible.

Disclaimer

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article.